Google and Motorola are accused of conspiring to inflate FRAND patent prices

[This article contains analysis and editorial content.]

The "fair, reasonable, and non-discriminatory" (FRAND) patent rules govern essential standards patents. FRAND patents are a double-edged sword. On the one hand, if your company's patent is accepted as a FRAND patent, it becomes an industry standard, guaranteeing you licensing fees from competitors. On the other hand putting research towards FRAND patents weakens a firm's both offensive and defensive legal capabilities.

I. Microsoft Looks to Block Google's Purchase of Motorola

The issue is hitting home for Motorola Mobility, one of the "big three" Android smartphone sellers. Motorola Mobility holds over 17,000 patents, yet its acquisition by Google Inc. (GOOG) is threatened by a storm of criticism regarding how it is using its FRAND patents. Microsoft Corp. (MSFT) has filed a complaint, which looks to potentially sink the acquisition, or force Motorola Mobility into a low-cost licensing scheme.

The formal competition law complaint was lodged by Microsoft deputy general counsel Dave Heiner, naming both Google and Motorola Mobility. In a blog Mr. Heiner writes, "Motorola has refused to make its patents available at anything remotely close to a reasonable price. We have taken this step because Motorola is attempting to block sales of Windows PCs, our Xbox game console and other products. Motorola is on a path to use standard essential patents to kill video on the Web, and Google, as its new owner, does not seem to be willing to change course."

In a statement to Reuters, Motorola Mobility spokeswoman Jennifer Erickson said that her firm had not yet received a copy of the complaint, but that it "committed to vigorously defending its intellectual property."

And a Google spokesperson stated, that the complaint was "just another example of their attempts to use the regulatory process to attack competitors."

The filing is troubling for Motorola, as Apple, Inc. (AAPL) also filed a similar FRAND complaint against Motorola this week, after losing two FRAND-related cases to Motorola in Germany. The losses have threatened to block sales of iPhone and iPad, as well as service from the iCloud. However, the European Commission could move to fine Motorola and/or prod Germany to overturn the decision, should it decide that Motorola's application of FRAND patents is abusive.

Ultimately these lawsuits represent the changing state of the phone industry, in terms of litigation.

Over the last decade Motorola Mobility and Samsung poured billions into research and development to try to perfect 3G and 4G communications, as well as related fields like video encoding. The operating assumption was that they would receive industry-wide licensing fees, which would offset any licensing costs of their own, which they might accrue.

However, this approach has been challenged in unique ways by both Microsoft and Apple.

II.ii. Apple Looks to Ban Everyone Who Stands in Its Way

Apple's approach is the most severe. It has patented a number of very low-level software algorithms, including user interface features [1][2] -- the kinds of features that were not traditionally patented on a cell phone; or alternatively were covered under one sweeping patent, which was narrowly applied.

What is particularly important, as well, is how Apple has chosen to apply these patents. Starting in the U.S., it has sued Motorola Mobility, Samsung, and HTC Corp. (TPE:2498), looking to remove their products from market, or push crippling restrictions onto their products. Apple has at times hinted that in 2009-2010, when the legal storm was first brewing, that it had offered licensing to Samsung, and perhaps other Android phonemakers. However, source indicate Apple's licensing demands were high, and it was only willing to license a scant few of its interface patents, making the deal essentially useless to the Android firms.

History aside, it is clear that Apple has little interest in reaching a licensing compromise with Android phonemakers at present. It wants to damage them competitively with its IP.

Some would call this approach genius on Apple's part; others would call it anticompetitive. Where members of the public stand on the issue partly boils down to a question of partisan bias -- iPhone owners tend to praise Apple's "innovative foresight", while Android owners condemn its "litigious abuse."

But bias aside, there are fundamental issues that make Apple's approach disruptive.

The issue -- and where FRAND comes in -- is that Apple is a newcomer to the phone market. Hence the majority of its patents have been on interface technology, rather than on wireless communications. Thus where as Samsung and Motorola Mobility have large IP libraries, much of it the most important patents are FRAND, and thus are crippled in terms of offensive or defensive use against Apple's non-FRAND patent library.

But Motorola has struggled in its countersuit, because -- again -- Microsoft was a disruptive sort of entrant to the industry, bringing with it a tradition of operating system development, a field of technology rife with design feature emulation, but with much of the development being conducted outside the confines of standardization.

Based on the two side's accounts, it appears that Microsoft approached Motorola seeking a net licensing fee along the lines of what HTC and Samsung agreed to. As with Samsung Microsoft considered the relatively high fee "pre-discounted" by Motorola's promise to license its IP (including the FRAND patents). Motorola felt this was unfair and rejected the deal, feeling it should break even or even be getting paid, not the other way around. The pair then went to war.

In the perfect world Samsung or Motorola might see their FRAND patent collection as being worth as much as Microsoft's software algorithm and user input patents. But Samsung's licensing concession illustrates that non-FRAND patents are currently worth, much more than FRAND ones.

Ultimately a $10 or $15 fee might seem innocent, given that the Android phonemakers still maintain a profit margin. But if you don't happen to be Apple, your profit margin is likely already razor thin and just a few of these fees (say one to Apple, one to Microsoft, etc.) could leave you with no profit, or even paying a net loss per handset. And the eroding margins would further cripple a firm's ability to fund research and development, file for patents, and provide an effective defense in court.

Microsoft accuses Motorola of asking for $22.50 USD per laptop for its fifty h.264 patents alone, versus the $0.02 USD that the holders of 2,300 other h.264 patents charge.

Clearly, Microsoft is making a strong case that Motorola is asking for a ridiculous fee -- the pressing question is what kind of fees Microsoft is asking for, for its non-FRAND IP. Clearly, Microsoft has been charging cooperative Android phonemakers orders of magnitude more that $0.02 for its own ubiquitous patents.

While it may not ultimately change whether or not Motorola is violating FRAND and should be punished, Microsoft's exorbitant licensing fees to Samsung, HTC, and others do offer some insight into why Motorola would stoop to such preposterous demands.

Today's hyper-competitive smartphone market has fostered a hyper-litigative approach, which is undermining the principles of FRAND and fair licensing. [Image Source: Best Buy]

Ultimately, this atmosphere will likely push the top veteran Android phonemakers like Motorola and Samsung away from offering their patents via FRAND, instead focusing on user interface patents. No longer is a patent's value based on its technological merits, a major component of is the ability to sue -- to in essence embody the antithesis of FRAND patents -- being unfair, unreasonable, and discriminatory (UUD).

The disadvantage of the UUD patent approach is that while it may spur innovation in the GUI and software realm, as competitors race to escape the scope of each others' patents, it will ultimately have a deep and deleterious effect on the state of wireless communications development.

Some of this effect may be offset by chipmakers like Qualcomm, Inc.'s (QCOM) emerging role in developing standardized wireless communications and media-encoding advances.

III.ii. The Game is Changed, the Rules May Need to be Changed, as Well

It is crucial for regulators in the EU, U.S., and elsewhere to carefully weigh the state of the market when considering Samsung and Motorola's claims against Apple and Microsoft. Traditionally, these claims would be considered abusive; their rates punitive; the suit itself patently discriminatory.

However, in today's atmosphere regulators must reexamine the fundamental "fair" worth of patents -- which is likely far different from traditional modest FRAND licensing fees (such as the $0.02 per 2,300 patents, cited by Microsoft).

Samsung sold over 35 million smartphones in Q4 2011. That means that Microsoft ultimately is pulling in over a $1B USD a year in licensing fees from Samsung alone -- over $300M USD a quarter. Given that these fees come from a relatively small core set of "strong" patents out of Microsoft's massive library, Microsoft's asking price for licensing likely grossly eclipses traditional FRAND rates.

Thus perhaps regulators need to redefine what is today a "fair" licensing rate and impose limitations on whether a company can be seeking a blanket ban on a competitor's products and still expect them to meekly license under FRAND terms.

[Original Image: Cayusa/Flickr; modifications: Jason Mick/DailyTech]

After all, FRAND is not exactly charity work, but there's an inherent premise of cooperation involved. When competitors refuse to cooperate, either seeking outright bans or astronomically higher per-patent licensing fees, the premise of FRAND cooperation begins to crumble.

Potential softening of FRAND protections would certainly be unfortunate, and in many ways could be antithetic to the spirit of FRAND. But ultimately, they're necessary to save any hope of ongoing FRAND work, given the market's entropic descent from a climate of cooperation, coupled with mild competition, into a savage sue-or-be-sued uncooperative, anticompetitive atmosphere.

Did anyone notice that these stories didn't blow up and become such a big issue until Apple put out the same device 3 times with a different radio and a few small tidbits added on to the OS?

It's still too small, the OS is still too cluttered, and (this is pure opinion) the software feels dated and weak.

It was after Samsung, HTC and others came out with devices that were bigger with a better feature suite(better cameras and AMOLED screens for example), and the Android OS matured into something far better than iOS (I believe this to be fact but yes it is opinion.), that Apple decided to cry like a baby and call foul. The point I'm making is easy to sum up. Apple couldn't compete in a market where putting a whimsical name on something, adding a camera and re-releasing it just wasn't good enough. Bigger & brighter screens, faster CPUs, software that let YOU customize the homepage beyond moving around the icons, and better call reception were things Apple didn't do.

quote: Did anyone notice that these stories didn't blow up and become such a big issue until Apple put out the same device 3 times with a different radio and a few small tidbits added on to the OS?

I think the main issue here is that Apple created the first full screen fully functional smartphone multi-touch device with full HTML browser and did so in a user friendly way. When they did it, they believed it was 'revolutionary' and 'magical' - and of course that's just marketing speak, but I think it's fair to say that they led the current industry to where it is right now with their iPhone launch back in 2007. I watched the launch video the other day - and the phone still looks modern and up-to-date even now. Anyway, back to point - because they came up with so many solutions to problems which other manufacturers hadn't really had to deal with yet - they patented it loads - trying to protect what they saw as their own invention.

Now, every manufacturer and his dog has basically copied their entire device selling point. Great for the consumer, but something Apple had tried to protect with patents. Hence all the lawsuits, and hence jobs describing Android as a 'stolen product'.

The devices aren't the same either, they each added progressive enhancements (more than most Android manufacturers do on their releases) - and the iPhone is still the fastest phone on the market in terms of the CPU/GPU combination. It also has a tied-lead for camera quality, and leads most battery life tables.

quote: It's still too small, the OS is still too cluttered, and (this is pure opinion) the software feels dated and weak.

That is all opinion. Most of which isn't shared by the millions of people who make the iPhone 4S the best selling phone ever.

quote: It was after Samsung, HTC and others came out with devices that were bigger with a better feature suite(better cameras and AMOLED screens for example)

Sorry but most people don't want bigger screens. My girlfriend looks at them and says 'what a brick'. People want a phone which can fit in their pocket, and a screen which they can reach all sides of with one handed. The camera on the iPhone 4S is as good as any leading Android handset too - and they don't have iCloud, Siri, or the software support anywhere near as good as iOS. You get iPhones from 2009 still running iOS 5 - some new Android handsets don't even have ICS. Sorry but to describe such an unsupported, bug ridden and insecure OS as superior is a bit ridiculous. I challenge you to find one practical and useful thing you can do on Android but not on iOS.

AMOLED screens do not work very well when viewed at from different angles - I don't believe anybody objects to the far higher PPI and therefore visually higher quality iPhone screens, particularly when they want a phone which fits in their pockets.

quote: The point I'm making is easy to sum up. Apple couldn't compete in a market where putting a whimsical name on something,

Apple just released the best selling phone of all time. Smashing records every which way. They are single handedly compared to the combined efforts of almost every other phone manufacturer - and often come out on top. Every Android manufacturer is having to compete at ridiculously low profit margins to even try to make a dent. In many ways, the most recent launch was the most successful ever, and you are concluding that they can't compete? I think it's more a case of they are proud of what they developed originally and want to protect it.

quote: Bigger & brighter screens

You mean, lower resolution, same brightness screens (they adapt to ambient lighting) which make your phone a brick which doesn't fit in your pocket, and doesn't look very good if viewed from an angle?

quote: faster CPUs

Clock-for-clock, the CPU's are inferior. At the clock speeds they sell at, even the fastest Android CPU is < 10% faster than the iPhone 4S. Add to this the fact that the GPU's are at least 2x slower (sometimes up to 5x slower) on Android phones, and consider that the operating system is graphics accelerated, and this becomes a nonsense. It also contributes to the much worse battery life.

quote: software that let YOU customize the homepage beyond moving around the icons

Because this is an important practical use of a phone, and your time.

quote: better call reception

This is simply not true. The dual antenna HSDPA+ design of the iPhone 4S has industry leading reception and performance, far exceeding the performance of any 4G Android phone for the vast majority of the world (since most of the world doesn't have 4G yet).

Now compare the reliability, the device support, the battery life, the customer satisfaction ratings, the much-faster-growing-and-already-larger app-store, Siri (useful for some), iCloud (useful for some), wireless streaming to TV (no Android phone does this)... taking into account the leading camera, fastest graphics card in any phone - and you have yourself a reason why it's the best selling phone ever.